The proposal aims to ensure that holding companies within the EU that do not meet the minimum substance requirements will no longer benefit from any tax advantages. This will additionally put pressure on jurisdictions with a regulatory framework allowing investors to take advantage of such benefits to amend local legislations, ultimately leading to a more even playing field within the EU.

Once adopted by EU Member States, the directive should come into effect on 1 January 2024. The status of the entities is determined by analysing the two preceding years and, as a result, 2022 is already in scope for potential reporting obligations.

Why are shell companies a problem?

A shell company is a cross‑jurisdictional structure with the objective of allowing its shareholders to pay less tax than they would normally pay through a legal entity domiciled in the same country where the shareholder resides, or shelter assets from taxes due. Such structures unfairly burden the ordinary taxpayer and create an uneven playing field within the European market.

What determines a shell company?

The proposal sets out a list of criteria to identify whether the legal entity should be deemed a shell company or a ‘reporting entity’, as it would then be obliged to regularly report its status as a shell company to the relevant tax authorities. As it stands today, the proposal suggests a three‑level filtering system, considered as a minimum substance requirement, where the following criteria must be breached to be deemed a shell company: